In Part 3 of the #MoneySmartMedics series, we discussed how to get started on your first budget. In this article, we are going to discuss fine tuning your budget to plan for the future, prepare for emergencies, and not fall victim to the curse of the short pay period (for those working on a 24-hour shift cycle).
This is where things start to get fun. As you do this, you will find that the more you separate yourself from the number “zero”, the more stress-free your life becomes. Remember, all you need is a pencil and paper to write a budget, so there’s no excuse not to jump and start!
Let’s do this…
Get Your Spending at Work Under Control Using Micro Budgets
Let’s face it, we spend money while we are at work. We spend a lot. Whether you’re working 24 hour shifts in a station, or 12 hour shifts on a street corner, you’re constantly faced with the temptation to swipe your debit card. For me, the biggest at-work expense was fast food. I was terrible about bringing my meals because, let’s be honest, it’s a real pain to do when you work long-hour shifts. It’s simply human nature to follow the path of least resistance. I get it. However, it’s GOT to stop.
Obviously, the best solution here is to just bring your own food to work. However, I know that’s easier said than done, and many people simply aren’t going to do it. If you are going to be spending money on food at work, you AT LEAST need to set a work-spending budget.
When I started budgeting, I found that I was spending anywhere from $200 – $300 a month at work ($8-$10 per meal x 3 meals per day x 10 work days). That’s insane! By using “micro budgeting”, I was quickly able to cut that down to $90 a month!
Yeah, you heard that right! Here’s how it worked:
Setting an all-encompassing fast-food budget simply didn’t work. I initially told myself that I would cut my fast-food spending down to $200 per month. While on paper it seemed like a great plan, it wasn’t practical without a system in place to keep me disciplined. I used to put $100 in an envelope every pay check, and that was supposed to be all I would spend. The problem was, I burned through it too fast. I continued spending $8-$10 per meal on the “value menu” (I use that term loosely) and before I knew it, my envelope was empty. After a couple pay cycles of running short, I knew I had to come up with another system.
I ended up creating a separate budget / envelope exclusively for fast-food spending while at work. I then set a per-meal budget of $5. On a 24-on / 48-off work schedule, this meant that I would need a max of $45 per week to cover my meals. The $5 per meal micro-budget virtually eliminated “value meals” as an option. I had to get creative, which meant choosing what and where I ate wisely. I became quite the connoisseur of the dollar menu and quickly found that $5 was actually more than I needed. After a few days, I ended up cutting that down to $3 per meal. That cut my per-week budget down to $27.
While a $2 savings per meal may not seem like much, try looking at it from a larger perspective:
$2 in saving per meal x 3 meals = $6 a day. $6 x 10 shifts in a month = $60 a month. $60 x 12 months = $720 a year.
Now, invest that $720 a year over the course of a 30-year career and you would have nearly $200,000. That’s a PAID FOR HOUSE.
Now, let’s take it step further and look at what happens when we invest the money we saved by lowering a $300 fast food AT WORK spending habit to $90 a month.
$300 (old spending habit) – $90 (new budget) = $210 a month. $210 a month x 12 months = $2,520 a year.
$2,520 a year invested = nearly $700,000! The interest alone on that amount would top your current annual income FOREVER. That’s an awesome retirement plan ON IT’S OWN!
The examples I just gave you can be applied anywhere. Imagine the savings when you apply these principles to ALL areas of spending? Get creative and make it happen!
Using Sinking Funds to Plan for the Future
I believe it was Benjamin Franklin that said “By failing to prepare, you are preparing to fail”. This quote is so simple, so true and SO applicable to our everyday lives, so why can’t we grasp this concept? Well, by following the principles in this section, “we” no longer has to apply to YOU.
You’re probably asking yourself: “what the heck is a sinking fund?” The unofficial version is: The best thing to come to personal finance since budgeting. The official version is: The act of setting aside increments of money to achieve a long-term savings goal. Translation? The cookie jar!
OK, so it’s a little more complicated than a cookie jar, but not much…
Sinking funds are a super easy and effective way to save for planned events, and even emergencies. For example: Christmas. It’s not an emergency, folks. It happens on the same day every year. Plan for it and set aside money in your Christmas fund every payday. Here’s how it works:
Christmas Budget = $1,000. Number of bi-weekly pay periods in a year = 26. $1,000 divided by 26 = $38.46.
This means you set aside $38.46 every paycheck into your Christmas envelope, cookie jar, etc to meet your savings goal.
You can do the same for things like vehicle maintenance / repairs, birthdays, car registration, taxes, vehicle replacement and yes….VACATION!
Be creative and start using sinking funds wherever you can. Don’t be caught off guard!
Preparing for Emergencies
I am writing this section with the assumption that you still have debt. As most of you know, I am a HUGE proponent of Dave Ramsey’s “Baby Steps”, so the advice I offer here will closely mirror what he already teaches. If you haven’t read about Dave’s baby step process, go check it out and then come on back.
Until your debt is completely paid off, you need to set aside $1,000 and LEAVE IT ALONE unless you have a real emergency. Remember the sinking funds? Get that $1,000 saved up AS QUICK AS POSSIBLE before you start saving for anything else.
If you’re following Dave’s baby steps, this should be done in step 1. If you find yourself having to use any of this money, revert back to step 1 and build this fund back up as soon as humanly possible.
Beating the “Short Pay Period” Curse
If you work 24-hour shifts, you know exactly what I’m talking about. On my 24-on / 48-off schedule, I have 2 “normal” pay periods, followed by 1 “short” pay period. This used to cause SO many problems for me if I didn’t work overtime. Planning for large expenses like rent and my car payment were difficult if the due date landed anywhere near my short paycheck. There’s a simple way to avoid this…
Add up all of your monthly expenses (or at least the large ones) and divide them by the amount of shifts you are scheduled to work each month. This way, you know exactly how much to set aside each pay period. Here’s an example:
Rent ($700) + Utilities ($300 total) + Car Payment ($400) = $1,400 a month.
$1,400 / 10 shifts per month = $140 per shift.
Regular pay period = 5 shifts (Set aside $700)
Short pay period = 4 shifts (Set aside $560)
You may have to add extra if you’re starting this budget during a short pay period. However, once you get through the first month, it will even out.
As you can see, the math works just like the sinking funds. Trust me, such a simple technique will save you tons of stress.
As you can see, there is no “magic formula” to being a Money Smart Medic. These budgeting practices are simple and very easy to implement. It’s all about behavior and very little about head knowledge.
Regardless of how much you make, you can apply these techniques to your budget. Quit making excuses for yourself. Get on the budget and find financial peace!